WilmerHale lawyers advise clients on every aspect of trade secret law from contracts to complex litigation. Below please find a short update on an important development in trade secret whistleblower protections in the Northern District of California.
Introduction
The Northern District of California is consistently ranked among
the top jurisdictions for civil trade secret litigation, with 28
complaints filed in the second half of 2023 alone.1
Meanwhile, the Department of Justice has followed through on its
promise in 2018 to combat economic espionage more aggressively
through criminal trade secret filings,2 with 47
individuals charged nationwide with the theft of trade secrets
between 2019 and 2022.3
On March 3, 2024, the U.S. Attorney's Office (USAO) for the
Northern District of California announced a whistleblower pilot
program that could change protections for whistleblowers.
Background
Since 2016, the Defend Trade Secrets Act (DTSA) has immunized from criminal or civil liability under federal or state trade secret law the disclosure of a trade secret that "(A) is made (i) in confidence to a Federal State or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal." 18 U.S.C. § 1833(b). In addition, the DTSA addresses the use of trade secret information in anti-retaliation litigation: "An individual who files a lawsuit for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order." Id.
Since the passage of the DTSA, courts regularly have held that "immunity is an affirmative defense, and entitlement to the immunity must be established by the defendant." Knox Trailers, Inc. v. Maples, 581 F. Supp. 3d 1000, 1016 (E.D. Tenn. 2022) (citing Ramirez Capital Servs., LLC v. McMahan, No. 4:21-cv-241-ALM, 2021 WL 5907791, at *4 (E.D. Tex. Dec. 14, 2021)). Courts regularly have also refused to grant motions to dismiss on immunity grounds where, for example, there is not an obvious nexus between the purported secrets and the defendant's claims against the plaintiff. Thermo Fisher Sci. Inc. v. Arthur, No. 4:23-CV-01098-JSD, 2023 WL 8435114, at *2 (E.D. Mo. Oct. 17, 2023) ("Arthur cannot claim immunity for his retention of thousands of document[s] when arguably only a fraction of those may have any merit as to the Company's alleged violations of law."); Argos USA LLC v. Young, No. 1:18-CV-02797-ELR, 2019 WL 4125968, at *6 (N.D. Ga. June 28, 2019) (holding that immunity protection does not extend to documents that had nothing to do with any allegations that could support the product liability action); but see FirstEnergy Corp. v. Pircio, 524 F. Supp. 3d 732, 741 (N.D. Ohio 2021) ("This case presents the unusual circumstance where Plaintiffs' own pleadings demonstrate the applicability of the immunity defense asserted under the Defend Trade Secrets Act.").
In sum, in civil cases, immunity may require a fact-based inquiry after the pleadings stage. The path to securing immunity from criminal liability before charges are filed would lie entirely within the discretion of the USAO.
The Northern District Of California Whistleblower Pilot Program
The USAO for the Northern District of California has instituted a whistleblower pilot program (WPP or Program) that gives greater definition to how the office will exercise the discretion to recognize immunity for whistleblowers who report criminal conduct involving trade secret theft. Effective March 14, 2024, "to encourage individuals to voluntarily report criminal conduct to the [USAO] and to provide actionable and timely information regarding other culpable parties,"4 the USAO will enter into non-prosecution agreements with individuals who report, among other things, "criminal conduct undertaken by or through public or private entities or organizations, including corporations, partnerships, non-profits, exchanges, financial institutions, investment advisers, or investment funds involving . . . intellectual property theft and related violations,"5 provided that certain conditions are met. Among those conditions are the following:
- The misconduct has not already been made public or reported to the DOJ;
- The whistleblower reports the conduct voluntarily and not in response to an inquiry or as the result of an existing obligation to report;
- The whistleblower provides "substantial assistance" to the government in its investigation;6 and
- The whistleblower "truthfully and completely discloses all criminal conduct in which the [whistleblower] has participated and of which the [whistleblower]" is aware."7
Implications of the Whistleblower Program
The Northern District of California likely will continue to be a critical jurisdiction for trade secret litigation, so trade secret owners will want to consider how the WPP may incentivize whistleblowers. Specifically, the WPP may provide a path to protection for criminal activity in which the whistleblower themselves participated. For example, an individual who engaged in misconduct but fears criminal sanctions could conceivably attempt to implicate the trade secret owner in their misconduct in a disclosure to the USAO under the WPP.
These incentives provide an additional reason for trade secret owners to create a comprehensive trade secret protection and compliance program, including regular audits of their intellectual property to ensure that information in the company's possession is accurately treated and protected as a trade secret. Audits not only improve protection against misappropriation (and later disclosure) but also enable trade secret owners to have a better sense of the information at issue if they learn that an individual has implicated the owner.
It is critically important for companies to maintain a robust system for encouraging the internal reporting of issues. Complaints and reports of noncompliance provide an essential feedback loop for detecting issues early. Not only should established reporting paths and mechanisms be in place, but employees of all levels of seniority should be aware of reporting procedures. With increased whistleblower protections, it is even more important for companies to have a strong culture of reporting—that is, employees should feel empowered to internally report issues timely and without fear of retaliation. In order to foster a strong culture of reporting, companies must follow up on reports timely and effectively. It is important to ensure thoroughness and consistency in investigating reports, and companies should take effective corrective action when necessary.
Conclusion
Experienced lawyers in WilmerHale's Investigations and Criminal Litigation and Intellectual Property departments are available to guide clients through the issues raised by the new Program.
Footnotes
1. Lex Machina, Trade Secret Cases in the Northern District of California, 2023.
2. US Department of Justice, Attorney General Jeff Sessions Announces New Initiative to Combat Chinese Economic Espionage (November 1, 2018), available at https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-announces-new-initiative-combat-chinese-economic-espionage (last accessed May 8, 2024)
3. Bureau of Justice Statistics, available at https://fccps.bjs.ojp.gov/ (last accessed May 8, 2024). Data for 2023 is not yet available.
4. US Attorney's Office for the Northern District of California, "NDCA Whistleblower Pilot Program," March 3, 2024, available at https://www.justice.gov/usao-ndca/whistleblower-program (last accessed May 9, 2024).
5. US Attorney's Office for the Northern District of California, "NDCA Whistleblower Pilot Program," March 3, 2024, available at https://www.justice.gov/d9/2024-03/ndca_whistleblower_pilot_program.pdf (last accessed May 9, 2024).
6. See US Sentencing Guidelines § 5K1.1 (providing factors to consider in determining whether a defendant has provided "substantial assistance" to government authorities, including "the significance and usefulness of the defendant's assistance," "the truthfulness, completeness, and reliability of any information or testimony provided," "the nature and extent of the defendant's assistance," and "the timeliness of the defendant's assistance."
7. US Attorney's Office for the Northern District of California, "NDCA Whistleblower Pilot Program," March 3, 2024, available at https://www.justice.gov/d9/2024-03/ndca_whistleblower_pilot_program.pdf (last accessed May 9, 2024). Other conditions include that the whistleblower is not the CEO or CFO of the company or an employee of the government and has not been previously convicted of certain categories of crimes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.